Short-term interest and mortgage rates rising in sync: what this means for real estate investors

Posted on Posted in Financial Trends, Investment & Financing, Investment Niches, Market Updates

An increase in short-term interest rates will result in increased mortgage rates.

This may be a statement of the obvious, but the potentially valuable implications for real estate investors may be less so.

The United Stated operates with a centralized banking system, and the single central bank, the brain that governs all the banks in the country, is known as the Federal Reserve System, usually abbreviated to the Federal Reserve or "the Fed."

The institution within the Federal Reserve that interests us the most is the Federal Open Market Committee (FOMC), consisting of seven governors of the Federal Reserve Board and five Federal Reserve Bank presidents. The committee meets eight times a year, and every stock exchange, every bank, every financial professional waits for outcomes of these meetings — because at those meetings the committee regulates the monetary policy of the United States, and by doing so, controls the activity of all American financial institutions.

One crucial instrument of such control is the unified short-term interest rates handed by the committee to the banks. These are the rates at which financial institutions are allowed to give each other extremely short-term loans. In simplified terms, that is the rate at which the Federal Reserve sells money to the banks — and then the banks re-sell it to their customers (we, the people). The short-term interest rate is, quite simply, “the cost of money” — it defines all the other interest rates in the American financial industry.

 

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